New Tax Framework Released, Questions on Details Remain

The “Big Six”—six top Republican leaders from the House, Senate, and the White House—released a new tax proposal, the “Unified Framework for Fixing Our Broken Tax Code,” on Wednesday, September 27, 2017. The framework outlines broad principles for tax reform. Released without many details, the plan leaves much to be worked out by members of the tax writing committees. The development process has been closely guarded and largely limited to the six leaders.

The new proposal does not explicitly address the elimination or preservation of Section 1031.

The new plan, titled “Unified Framework for Fixing Our Broken Tax Code,” covers only broad principles, omitting critical details. Even fellow Republicans on the tax writing committees have as many questions as the public.

The Big Six is a small group comprised of Speaker of the House Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chairman Orrin Hatch (R-UT), House Ways and Means Committee Chairman Kevin Brady (R-TX), Treasury Secretary Steven Mnuchin, and National Economic Council Director Gary Cohn.

Broad Principles, But Few Details

The “Unified Framework for Fixing Our Broken Tax Code” reveals only broad principles, without details of tax brackets, proposed methods, costs, or pay-fors. Many decisions on the unspecified details in the plan will be made by the tax-writing committees.

Republican leaders have expressed agreement on several important ideas within the new document.

Here’s what we do know from the new Tax Framework:

The document is a hybrid version of the House Republican Blueprint and the Trump Tax Plan, and includes some new elements.

The Border Adjustment Tax (BAT), is not part of the Tax Framework.

Immediate Expensing of capital investments is still a key proposal, but it is now limited to “new investments in depreciable assets other than structures made after September 27, 2017.” The term “new investments” is believed to refer to newly acquired property, the same application as current law. This proposal would be temporary, to last “at least five years.”

The document reduces tax rates, bringing the corporate tax rate to 20%, small business pass-through entity rate to 25%, and implements an unspecified low rate to encourage repatriation of foreign assets.

The plan simplifies and lowers individual tax rates from seven brackets to three, at 12%, 25%, and 35%. The document does not specify the income qualifications for these new rates.

The plan also:

Doubles the Standard Deduction to $12,000 for single taxpayers, $24,000 for married joint filers; enhances the Child Tax Credit; and eliminates the Alternative Minimum Tax (AMT).

Eliminates most itemized deductions, except for home mortgage interest and charitable contributions. Many expect that the deduction for state and local taxes, important to taxpayers in high tax states like California, New York, New Jersey, and Illinois, will be eliminated.

Repeals the Estate Tax. This proposal leaves the application of stepped-up basis in question. The FEA team posed this question to several Members of Congress, including some on the tax-writing committees, who did not know whether the elimination of the estate tax would come with a reversion to carry-over basis. The estate tax impacts relatively few wealthy Americans, but stepped-up basis benefits all taxpayers, and a return to carry-over basis would create tax liability and an accounting nightmare for everyone with an inherited asset.

Omits immediate expensing for real estate improvements. For taxpayers investing in the real estate industry, this change comes as an improvement over past proposals, and bolsters the argument for retention of Section 1031 like-kind exchanges.

Includes a five-year temporary window for the immediate expensing of investments in depreciable assets other than structures. However, the ability to write off (expense) new assets in one year would sunset after five years. This application may be intended to become a “permanent ‘temporary’ provision,” as have other unrelated provisions in the past, but the uncertainty makes long-term planning difficult for businesses.

Republican leaders have expressed the desire to move this new tax reform framework through the process quickly.